In a letter to a Dutch newspaper, Jean Frijns, director ABP Investment Management, and Roderick Munsters, director PGGM Investments, have explained why the two giant Dutch pension funds have decided to suspend their stock lending programmes.
They agree that this will make short-selling trickier, but deny they blame “hedge funds” for the fall in stock markets, praising leveraged funds for improving market efficiency and attributing the fall instead to a “loss of faith” by long-only investors in the wake of the Enron and WorldCom scandals and signs of graft on Wall Street. They explain their own change of policy as a temporary response to dangerous volatility in the markets, and not as a blanket attack on short selling in general and hedge funds in particular.
We … are not concerned at present with the relative efficiency of the market – is share A priced well compared with share B – but with the dynamics of the market as a whole in extreme circumstances. With the question of stability therefore. Large external shocks, like the [current] confidence crisis, may generate a self-reinforcing process. Solvency norms with institutional investors or with ‘leveraged’ investment funds may start working as sales triggers. Other parties, including hedge funds, may anticipate to this by short-selling. This is a form of speculative behaviour that has nothing to do with fundamental arbitrage. This causes the process to become self-reinforcing.
Reason does not hold sway, but rather a more technical process of selling, staying below the stability norms, forced sales, etc. Theoretical studies show that such a process is only stable if there are sufficient buyers who can oppose it. ABP and PGGM wish to oppose this process as much as possible.
Fundamentally, shares are attractively priced; that is definitely true for a long-term investor. We maintain therefore our long-term strategy in which shares figure prominently. This means that we do not sell shares, but, on the contrary, make additional purchases on a modest scale. In addition, we provide liquidity to the market by writing put options. Finally, by putting a temporary stop to the loaning-out of shares, we try to increase the price of the anticipating selling of shares. In short, we are concerned with stability of markets. The most important condition for this is restoration of confidence. Sharpening of Corporate Governance standards and a more active role of all institutional investors is, in our vision, priority number one. Besides, there is the more technical problem of market stability in a world of stringent solvency norms and anticipatory/speculative selling behaviour by the large market parties.
Thorough studies in this field are required and are welcomed by us. In the short term, on the basis of fundamental valuation, the equilibrium of the lack of balance between technically driven sellers and buyers must be restored. This is precisely what ABP and PGGM are committed to.